Text PAQ 5.26 Types and persuasiveness of audit evidence

Required:

(a) List the types of audit evidence gathered by Dinitha and comment on the persuasiveness of each type.

(b) Link each type of evidence to the relevant accounts receivable assertions.

As for PAQ 5.36 above, this suggested answer does not provide you with a reference to the applicable ASA which should guide your response … you should be able to locate the ASA and indicate which paragraphs are being illustrated by each type of evidence identified below.

a. Dinitha has gathered the following evidence:

• External confirmations – 30% of which were positive confirmations and 70% negative confirmations.
• Documentary – invoices, cash receipts and sales returns vouchers.
• Verbal – interviews with accounts receivable manager, CFO and accounts receivable department.

b. The external confirmations provide evidence about the existence of accounts receivable when the debtors reply and confirm that they owe the client money for goods or services. Negative confirmations provide more limited evidence about existence when the customer does not reply to state that they do not owe the client money. The confirmations also provide evidence about rights and obligations assertion because the customer confirms that they owe the client.

The documentary evidence relates to the existence and valuation and allocation assertions for accounts receivable when Dinitha vouches the balances back to the underlying sales documents. It relates to the completeness assertion when Dinitha traces the sales transactions to the accounts receivable balance. In addition, the vouching of accounts receivable back to sales returns and cash receipts documents provides evidence about the occurrence of these transactions, and thus the completeness of the accounts receivable balance. The tracing of these transactions to accounts receivable provides evidence about the completeness of the record of these transactions, and thus the existence of the accounts receivable balance. The review of subsequent cash receipts also provides evidence about existence and valuation and allocation because when a customer pays their account they are confirming that they owed the balance on the balance date and they were in a position to make a payment.

The verbal evidence could relate to all assertions, depending on the topic of conversation. The auditor is likely to ask about procedures used to identify potential bad debts (valuation and allocation), about credit control (valuation and allocation), segregation of duties (primarily existence, rights and obligations, completeness), about control systems in general (which would relate to all assertions).